1981 (9) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the liability to pay additional bonus of Rs. 1,32,795 arose in 1969.
2. Whether the said sum was allowable as a deduction in the assessment year 1970-71.

Detailed Analysis:

Issue 1: Liability to Pay Additional Bonus of Rs. 1,32,795
The primary question was whether the liability to pay the additional bonus of Rs. 1,32,795 arose in 1969. The Income Tax Officer (ITO) initially disallowed the assessee's claim on the grounds that the liability was a provision for exgratia compensation and was neither ascertained nor quantified. The Appellate Assistant Commissioner (AAC) upheld this disallowance, noting that the memorandum of settlement regarding bonus payable for the accounting years 1968 to 1971 was signed on January 15, 1970. This indicated that the matter was under dispute until the end of the assessment year. The AAC concluded that the liability did not become legally enforceable until the settlement was executed in January 1970. The Tribunal affirmed this view, stating that a tentative decision had been taken, but no finality could be attached to it until the formal document was executed.

Issue 2: Allowability of Rs. 1,32,795 as a Deduction in the Assessment Year 1970-71
The Tribunal held that the liability to pay Rs. 1,32,795 did not arise during the year under consideration (1969) and thus was not allowable as a deduction in the assessment year 1970-71. The Tribunal emphasized that the liability became legally enforceable only upon the execution of the settlement on January 10, 1970. The assessee contended that there was a statutory liability to pay bonus under the Payment of Bonus Act, 1965, which included a minimum bonus and additional bonus based on allocable profits. However, the Revenue argued that there was no available surplus, and thus no scope for the application of Section 11 of the Act. The Tribunal ultimately concluded that the liability could only arise in the year when the settlement was reached between the parties.

Conclusion:
The High Court noted that the Tribunal had not clearly adjudicated whether there was any settlement under Section 34(3) of the Bonus Act, even though it was formally executed after the accounting year in question. The Tribunal's observations were ambiguous regarding whether there was a bilateral adjustment or understanding, or merely a unilateral decision by the assessee. The High Court remanded the matter to the Tribunal to determine if there was any understanding or adjustment between the parties in the year in question. If such an understanding existed, the amount would be deductible; otherwise, there was no accrued liability. The High Court declined to answer the question and directed the Tribunal to dispose of the appeal after allowing the parties to adduce further evidence.